An overview of risk for successful invoice factoring

At Populous World, the risk management function is an integral component of our invoice factoring process and occupies a risk department among the factors.

When setting up a file for invoice factoring, once the prospect’s factor-ability is established, the last obstacle to be overcome is that of risks.

Customer risk management is based on several tools for assessing the creditworthiness of debtor customers. To be eligible, the prospect’s trade receivables must meet certain creditworthiness criteria.

The evaluation is not subjective but is based on a set of expertise that will apprehend the prospect and formulate a risk rating such as a ‘z-score’, the study of the history of a company or the directors.

For the purpose of this article, we will present the different risks that may occur when facilitating invoice finance activity:

• Dispute risk – this occurs when the service does not reach the expectation of the client.
• Dilution risk – this occurs if there is a conflict concerning the repayment of an invoice (no repayment or no repayment in full).
• Payment delay risk – this occurs when the client takes time to pay back the invoice and the invoice becomes overdue.
• Insolvency risk –in the event that it’s a risk for a creditor to lose his claim definitively as the debtor cannot, even by liquidating all his assets, repay all his commitments.

Solutions

It is crucial to analyse in depth the financial health of the company with the balance sheet.
The history of a company is also fundamental to know, in the event that any bankruptcy has happened previously.
Other tools are available to reduce the risk that can affect us such as credit insurance.
Credit insurance is a system we put in place to cover the risk of our customer.

Upon credit insurance, the following evaluations are carried out:

• Analysis of the risk of non-payment; (accepts, caps, or refuses coverage).
• Manages the risk of non-payment: management of litigation and reminders, collection actions.
• Compensate for the risk of non-payment: provides compensation at the end of a waiting period.
• Credit insurance is therefore implemented to highlight a company’s path and prevent, treat and repair in the event of an incident.

Jeremy Carvalho.
Credit risk analyst, Populous World.